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Long- and Short-Run Components of Factor Betas: Implications for Equity Pricing

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Author(s)

  • Weining Wang
  • Aijun Hou
  • Charlotte Christiansen
  • Hossein Asgharian

Department/unit(s)

Publication details

JournalJournal of International Financial Markets, Institutions and Money
DatePublished - 20 Aug 2021
Original languageEnglish

Abstract

We propose a bivariate component GARCH-MIDAS model to estimate the long- and short-run components of the variances and covariances. The advantage of our model to the existing DCC-based models is that it uses the same form for both the variances and covariances and that it estimates these moments simultaneously. We apply this model to obtain long- and short-run factor betas for industry test portfolios, where the risk factors are the market, SMB, and HML portfolios. We use these betas in cross-sectional analysis of the risk premia. Among other things, we find that the risk premium related to the short-run market beta is significantly positive, irrespective of the choice of test portfolio. Further, the risk premia for the short-run betas of all the risk factors are significant outside recessions.

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